GIFT   OF 


1 


nX?t- 


The  Carnegie  Foundation  Plan 

of  Insurance  and  Annuities 

for  College  Teachers 


M.  ALBERT  LINTON 


Published  by   ' 

THE  PROVIDENT  LIFE  AND  TRUST  COMPANY 

OF  PHILADELPHIA 

Fourth  and  Chestnut  Streets 

December,  1918 


2261   J2.I8 
(Rev.) 


NOTE 

THIS  pamphlet  has  been  prepared  for  the  use  of  the 
agents  of  the  Provident  Life  and  Trust  Company,  and 
of  others  who  are  interested  in  the  principles  of  insur- 
ance protection  put  forth  by  the  Carnegie  Foundation. 
There  is  no  antagonism  on  the  part  of  the  Company 
to  the  idea  of  faculty  members  availing  themselves  of  the 
benefits  offered  to  them  by  the  Foundation  through  the 
Teachers*  Association.  Their  right  to  avail  themselves  of 
these  benefits,  and  to  choose  the  form  of  policy  in  their 
Association  which  their  good  judgment  shall  dictate,  is  too 
obvious  to  need  demonstration. 

Unfortunately  the  Handbook  of  the  Association  and 
certain  publications  of  the  Carnegie  Foundation  contain 
statements  that  may  easily  give  the  impression  that  the  old 
age  endowment  policy — the  policy  maturing  at  some  definite 
age,  say  between  the  ages  of  60  and  70 — is  an  inherently 
objectionable  form  of  insurance.  There  are  thousands  of 
policyholders  in  this  and  other  companies  who  hold  this 
form  of  policy,  and  we  feel  it  our  duty,  in  the  light  of  the 
statements  of  the  Carnegie  Foundation,  to  present  as  simply 
as  possible  the  principles  underlying  the  old  age  endow- 
ment policy  issued  on  a  participating  basis.  Our  faith  in 
this  form  of  policy  results  from  our  experience  with  thou- 
sands of  policyholders  whose  old  age  endowments  have 
matured. 

In  furtherance  of  this  thought  this  pamphlet  was  shown 
to  several  well  known  college  professors,  with  the  result 
that  we  have  been  asked  whether  we  would  be  willing  to 
send  copies  to  the  members  of  the  American  Association  of 
University  Professors.  Dr.  S.  S.  Huebner,  Professor  of 
Insurance  and  Commerce  in  the  Wharton  School  of  the 
University  of  Pennsylvania,  says : 

"Your  pamphlet  deals  so  fairly  with  many  of  the  vital 
topics  under  consideration  in  connection  with  the  Carnegie 
Foundation  Plan  of  Insurance  and  Annuities,  that  I  would 
very  much  like  to  have  it  in  the  possession  of  every  member 
of  the  Association.  I  took  the  liberty  of  sending  a  copy  of 
your  pamphlet  to  Dean  Stone,  Chairman  of  the  American 
Association's  Committee  on  Insurance  and  Pensions.  He 
agrees  with  me  that  it  would  be  a  fine  thing  to  have  the 
Association  membership  become  acquainted  with  the  points 
made  in  your  article." 

It  is  in  response  to  this  suggestion  that  the  pamphlet 
is  sent  you. 


The  Carnegie  Foundation  Plan 

of  Insurance  and  Annuities 

for  College  Teachers 


M.  ALBERT  LINTON 

Vice-President,  The  Provident  Life  and  Trust  Company 

of  Philadelphia 

Fellow  Actuarial  Society  of  America 

Fellow  Institute  of  Actuaries  {London) 


°>  •. 


Published  by 

THE  PROVIDENT  LIFE  AND  TRUST  COMPANY 

OF  PHILADELPHIA 

Fourth  and  Chestnut  Streets 

December.  1918 


2261   12.18 

(Rev.) 


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'ly 


V 


<o 


^i 


* •     •  •^  •  «     • 


The  Carnegie  Foundation  Plan  of 

Insurance  and  Annuities  for 

College  Teachers 


In  March  1918,  the  Teachei^'  Insurance  and  Annu- 
ity Association  of  America  was  incorporated  under 
the  insurance  law  of  the  State  of  New  York  for  the 
purpose  of  furnishing  life  insurance  and  annuity 
policies  to  the  college  teachers  of  the  United  States 
and  Canada.  The  Association  is  closely  allied  with 
the  Carnegie  Foundation  for  the  Advancement  of 
Teaching  which  supplied  the  capital  and  surplus  of 
$1,000,000.  The  expenses  of  the  Association  will  be 
paid  from  the  income  on  the  capital  and  surplus  or,  if 
this  should  be  insufficient,  then  from  the  funds  of  the 
Carnegie  Foundation.  This  expense  provision  has 
been  made  in  the  hope  that  the  Association  will  be 
able  to  furnish  insurance  and  annuity  policies  at  rates 
lower  than  the  rates  of  the  private  companies  who,  of 
course,  have  to  meet  their  expenses  out  of  the  pre- 
miums paid  by  their  policyholders. 

Several  publications  of  the  Carnegie  Foundation 
have  dealt  with  the  proposed  plan  of  insurance  and 
annuities,  which,  we  are  told,  has  been  evolved  with 
the  co-operation  of  experts  in  Europe  and  America, 
and  is  based  upon  exhaustive  original  research.  It  is, 
therefore,  bound  to  command  serious  attention,  not 
only  from  college  teachers,  who  are  most  intimately 


414727 


concerned,  but  also  froin  all  who  are  interested  in  the 
appHcatipn  of  life  insurance  to  the  needs  of  society. 

Two  Major  Contingencies  to  Be  Met 

The  Carnegie  Foundation  has  ably  analyzed  the  two 
major  contingencies  facing  the  average  man.  First, 
the  contingency  of  premature  death  which  may  plunge 
his  dependent  family  into  privation  and  suffering,  and 
second,  the  contingency  of  reaching  the  end  of  his 
income-earning  career  without  sufficient  means  to  pro- 
vide adequately  for  the  declining  years  of  himself  and 
his  family.  The  experience  of  The  Provident  Life 
and  Trust  Company  during  the  last  fifty  years  thor- 
oughly supports  this  analysis.  It  is  true  in  every  detail. 
Ever  since  the  Provident  commenced  business,  it  has 
been  advocating  and  selling  a  policy  prepared  par- 
ticularly to  meet  these  two  contingencies.  The 
Company  is  therefore  intensely  interested  in  applying 
the  results  of  its  own  experience  to  test  the  proposed 
plan  of  the  Carnegie  Foundation.  If  the  Carnegie 
plan  is  superior,  life  insurance  companies  should 
adopt  it. 

The  Proposed  Plan 

The  Handbook  of  the  Teachers'  Association  sets 
forth  its  ideal  plan  for  meeting  the  two  contingencies. 
To  meet  the  contingency  of  dependency  in  old  age,  it 
recommends  an  annuity  policy  providing  at  the  retire- 
ment age,  say  age  65,  a  fund  sufficient  to  purchase  some 
form  of  annuity  for  the  remainder  of  life.  Prior  to 
the  retirement  age  the  annuity  policy  operates  upon 
the  simple  plan  of  a  savings  fund  which  accumulates 


at  interest  from  the  periodical  payments  made  by  the 
teacher.  To  meet  the  contingency  of  premature  death, 
life  insurance  is  recommended.  For  teachers  not  over 
40  years  of  age  a  special  decreasing  insurance  policy 
has  been  devised  to  accompany  the  annuity  policy. 
The  insurance  policy  provides  that  the  full  face  value 
shall  be  paid  if  death  occur  prior  to  age  41.  At  age  41, 
and  each  year  thereafter,  there  occurs  a  reduction  in 
the  amount  of  insurance  equal  to  3  per  cent,  of  the 
original  face  value.  At  age  70,  thirty  reductions  have 
occurred  and  the  insurance  has  been  reduced  to  10  per 
cent,  of  the  original  face  value.  Thereafter  the  reduc- 
tion ceases.  It  is  further  provided  that  premium 
payments  shall  cease  at  age  65. 

Analysis  of  the  Combination 

For  the  purpose  of  analyzing  this  combination,  we 
shall  assume  as  the  basis  of  our  computation  the 
American  Experience  Table  of  Mortality  and  interest 
at  3^  per  cent.  This  basis  provides  the  smallest  net 
life  insurance  premiums  permitted  by  law.  We  will 
assume  that  the  policy  is  taken  out  at  age  30,  and  that 
the  amount  of  the  savings  fund  that  is  to  be  available 
at  age  65  for  the  purchase  of  the  annuity,  and  the  face 
value  of  the  insurance  policy  before  any  reduction  has 
occurred,  are  each  equal  to  $10,000.  On  the  basis  of 
these  assumptions  we  find  that  the  net  annual  premium 
for  the  annuity  policy  is  $145,  and  for  the  insurance 
policy  $99— a  total  of  $244. 

A  teacher  therefore  who  holds  these  two  policies 
involving  a  net  premium  of  $244  each  year,  will  be 


protected  against  the  two  contingencies  above  dis- 
cussed. If  he  lives  to  attain  age  65,  the  savings  fund 
will  have  attained  its  contemplated  amount  and  the 
annuity  will  commence.  If  he  does  not  live  to  attain 
age  65,  his  widow  receives  both  the  amount  of  the 
savings  fund  accumulated  to  date,  and  the  amount  of 
the  insurance  policy.  The  following  table  shows  the 
total  amount  produced  by  the  two  policies  if  death 
occurs  at  certain  specified  times : 

If  Death  occurs  Age  Total  Amount 

at  end  of:  Attained  Payable 

1  year    31     $10,150 

5  years    35     10,804 

10  years    40     11,759 

20  years    50     11,241 

30  years    60     11,742 

At  the  end  of  35  years,  when  age  65  has  been  attained, 
the  savings  fund  matures  for  the  cash  sum  of  $10,000, 
with  which  the  annuity  is  purchased.  The  premiums 
cease  on  the  insurance  policy  which  then  has  been 
reduced  to  the  face  value  of  $2500,  payable  in  event  of 
death.  The  reduction  continues  at  the  rate  of  $300 
each  year  until  at  age  70  the  face  value  has  been 
reduced  to  $1000. 


A  Hybrid  Endowment 

The  irregular  series  of  amounts  shown  in  the  table 
at  once  suggests  the  possibility  of  simplifying  the  com- 
bination so  that  the  amounts  would  remain  uniform 


from  year  to  year.  This  simplification  is  readily  made 
and,  moreover,  may  be  embodied  without  the  slightest 
difficulty  in  one  single  contract  instead  of  two,  as  in 
the  Carnegie  plan.  If  the  proposed  simplification 
were  made,  the  same  net  premium  of  $244  would 
provide  a  policy  paying  $11,240  in  the  event  of  death 
at  any  time  prior  to  age  65,  and  also  the  same  sum, 
$11,240,  if  the  policyholder  survived  to  age  65. 
Under  this  simplified  plan  the  insurance  would  cease 
as  soon  as  the  $1 1,240  had  been  paid  at  age  65.  There 
would  seem  to  be  no  valid  reason  for  insurance  pro- 
tection after  the  savings  fund  has  attained  its  contem- 
plated total. 

The  simplified  combination  at  which  we  have 
arrived  is  nothing  more  or  less  than  the  true  endow- 
ment policy.  The  true  endowment  policy,  although 
embodied  in  one  single  contract,  is  likewise  a  combina- 
tion of  a  savings  fund  and  a  term  insurance  element. 
But  it  possesses  the  advantage  that  the  continuing 
increase  in  the  savings  element  is  exactly  and  auto- 
matically balanced  by  the  continuing  decrease  in  the 
insurance  element,  so  that  exactly  the  same  amount  is 
payable  in  the  event  of  premature  death  as  would  have 
been  paid  if  the  policyholder  had  lived  to  complete  his 
savings  fund.  Nothing  could  be  simpler  than  this 
single  contract  performing  its  double  function.  More- 
over, experience  has  demonstrated  that  the  true  endow- 
ment maturing  at  the  close  of  a  man's  income-earning 
career  is  an  ideal  form  of  policy  with  which  to  provide 
against  the  two  contingencies  of  life,  so  ably  analyzed 
by  the  Carnegie  Foundation.  The  result  of  our 
analysis  leads  to  the  conclusion  that  the  Carnegie  com- 


bination  is  simply  a  hybrid  form  of  endowment  policy 
considerably  more  complicated  than  the  true  endow- 
ment. 

Does  Carnegie  Foundation  Understand  the 
Endowment  Policy? 

In  view  of  this  conclusion  we  are  completely  at  a  loss 
to  understand  why  the  Carnegie  Foundation  in  writing 
of  the  endowment  policy  fails  to  emphasize  that  the 
endowment  policy  is  peculiarly  adapted  to  meet  the 
two  contingencies  for  which  their  peculiar,  two-policy 
combination  was  devised.  In  the  Supplement  follow- 
ing this  article,  we  reprint  the  three  extended  refer- 
ences to  the  endowment  policy  appearing  in  Bulletin 
Number  Nine  (1916)  and  the  Annual  Reports  for 
1916  and  1917  published  by  the  Foundation.  Through- 
out these  references  it  is  evident  that  the  Foundation 
stresses  the  conception  of  the  endowment  policy  as  an 
"investment"  policy.  In  one  sense,  of  course,  the 
endowment  is  an  investment,  but  it  is  an  investment 
in  exactly  the  sense  that  the  word  applies  to  the  Car- 
negie combination.  In  fact,  the  combination  of  the 
$10,000  Carnegie  decreasing  insurance  policy  with  the 
$10,000  annuity  policy  involves  a  net  premium  of  $244, 
against  $217  for  the  regular  $10,000  Endowment  at 
age  65,  although  each  provides  the  same  sum,  $io,ooo, 
at  maturity.  In  other  words,  the  cost  of  the  larger 
insurance  element  in  the  Carnegie  combination  will 
make  the  combination,  from  the  investment  point  of 
view,  appear  less  favorable  than  the  Endowment  at  65. 
Yet  in  spite  of  this  fact  we  read  in  the  recently  pub- 
lished Handbook  of  the  Teachers'  Association*  that 

♦Pp.  12,  13. 

8 


endowment  insurance  "is  the  most  expensive  form  of 
insurance  as  it  provides  both  insurance  protection  and 
investment" ;  and  that  "the  Association  does  not  regard 
the  endowment  form  of  insurance  as  adapted  to  the 
circumstances  of  teachers  in  general.  To  meet  excep- 
tional cases  it  offers  endowment  insurance  maturing  at 
age  sixty- five/'     (The  italics  are  our  own.) 

An  Example^of  Actual  Cost 

At  this  point  it  will  be  instructive  to  investigate  the 
cost  of  one  of  these  "most  expensive  forms  of  insur- 
ance" which  recently*  matured  in  the  Provident 
which,  of  course,  was  not  subsidized  as  to  its  manage- 
ment expenses,  as  is  the  Teachers'  Association.  The 
policy  which  matured  was  an  Endowment  at  65,  taken 
originally  at  age  30.  The  actual  cost  upon  a  $10,000 
basis  is  shown  by  the  following  figures: 

Total  premiums  paid  to  the  Company. . .  .$9,055 
Total  surplus  returned  by  the  Company. .   2,575 


Difference=:total  net  cost  during  35  years. .  $6,480 
Average  net  cost  per  year $185 

Comparing  this  average  net  cost  of  $185  for  a  Provi- 
dent $10,000  Endowment  at  65,  with  the  cost  of  the 
hybrid  combination,  how  can  the  endowment  be  con- 
demned as  expensive? 

It  will  be  noted  that  the  low  net  cost  shown  in  the 
foregoing  example  was  attained  as  a  result  of  the  dis- 
tribution of  surplus.  It  shows  clearly  that  the  ultimate 
cost  to  the  policyholder  does  not  depend  primarily 
upon  the  gross  premium  charged,  but  upon  the  amount 

♦September,  1918. 


of  surplus  realized.  Under  a  participating  contract, 
the  actual  cost  of  the  insurance  depends  upon  the 
experience  of  the  company  and  not  upon  the  assump- 
tions underlying  the  premium  calculations. 

Why  Non-Participating  Policies? 

Now  a  word  or  two  about  the  policies  of  insurance 
that  the  Teachers'  Insurance  and  Annuity  Association 
plan  to  offer.  The  Association  will  issue  all  the  usual 
forms  of  insurance  and  annuity  policies,  although  the 
decreasing  insurance  policy  combined  with  the  annu- 
ity policy  represents,  in  the  eyes  of  the  Carnegie 
Foundation,  the  ideal  scheme  of  complete  protection 
for  the  teacher  not  over  40  years  of  age.  The  Associa- 
tion will  conform  to  the  insurance  laws  of  the  State  of 
New  York  and  will  issue  insurance  policies  at  net 
legal  rates,  that  is,  at  rates  not  lower  than  those  com- 
puted upon  the  net  American  3^  per  cent,  basis.  We 
are  told  that  the  policies  will  be  non-participating  as 
"it  is  evident  that  distributions  on  a  participating 
policy  issued  at  net  rates  would  be  so  small  during  the 
first  years  of  its  existence  that  if  distributed  in  annual 
dividends  they  would  not  in  some  cases  pay  the  cost 
of  postage."  *  In  view  of  the  fact  that  no  expense 
charge  will  be  borne  by  the  policyholders  this  is  a 
remarkable  statement.  And  we  shall  see  why  it  is 
remarkable  if  we  compute  the  surplus  that  would  be 
realized  should  the  actual  rate  earned  be  4j4  per  cent, 
and  the  actual  mortality  rate  experienced  be  70  per 
cent,  of  that  shown  by  the  American  Table.  (For  the 
five  years  1913  to  1917  inclusive,  the  average  rate  of 
forty-five  private  companies  was  66  per  cent.)     The 

•Twelfth  Annual  Report  (1917),  p.  46. 

10 


following  figures  relate  to  $10,000  of  insurance  taken 
at  age  30. 

Net  Yearly  Average  Yearly 

Kind  of  Policy  Premium:  First  Year         Surplus  for 

American  3J^%  Surplus  35  Years 

Endowment  at  65 $217.10  $27.10  $61.00 

Twenty  Payment  Life..     247.10  27.30  62.80 

Ordinary    Life    171.90  26.80  56.30 

Term  to  65 120.90  26.30  50.90 

Since  none  of  this  surplus  will  be  needed  for  expenses, 
it  will  all  be  available  either  for  building  up  a  con- 
tingent fund  or  for  distribution.  Assuming  that  one- 
half  is  withheld  for  contingencies,  the  remaining  half 
is  by  no  means  insignificant.  If  the  policyholder  is  to 
receive  his  insurance  at  actual  cost  the  surplus  must 
eventually  be  distributed.  The  surplus  under  the 
policies  of  the  Teachers'  Association  will  undoubtedly 
be  large,  and  we  see  no  valid  reason  why  the  contracts 
should  not  provide  for  participation  unless  it  is  de- 
sired to  withhold  the  surplus  from  the  control  of  the 
teachers.  * 

The  Published  Rates  of  the  Association 

Thus  far  our  analysis  of  the  Carnegie  Foundation 
combination  has  involved  net  premiums  computed  upon 
the  American  3%  per  cent,  basis.  The  actual  rates 
published  in  the  Handbook  of  the  Teachers'  Associa- 
tion indicate  that  the  insurance  premiums  have  been 
computed  upon  this  basis,  but  that  the  savings  fund 
annuity  premiums,  as  permitted  by  the  law  relating 
to  annuity  calculations,  have  been  computed  upon  a 

*  The  Association  will  probably  not  be  able  to  confine  certain  of  its 
expenses  within  the  assumed  mortality  gains  specified  in  the  New  York  law, 
so  that  the  premium  rates,  if  made  participating,  should  be  somewhat 
increased  to  meet  the  technical  requirements  of  the  law.  The  effect  upon 
the  net  cost,  however,  would  be  negligible  since  the  distributable  surplus 
would  likewise  be  increased. 

11 


4  per  cent,  basis.  Now  the  higher  the  interest  assump- 
tion, the  smaller  the  resulting  premium,  since  the  more 
interest  received,  the  less  money  the  policyholder  will 
be  called  upon  to  pay.  Therefore,  the  combination  of 
the  savings  fund  premium  computed  upon  a  4  per  cent, 
basis,  with  the  decreasing  insurance  premium  com- 
puted upon  a  Zy^  per  cent,  basis,  yields  a  total  that  is 
smaller  than  the  total  of  the  two  net  3j^  per  cent,  pre- 
miums which  we  employed  to  obtain  a  true  comparison 
with  the  regular  Endowment  at  65.  We  found  (page  S) 
that  $244  was  the  total  net  yearly  premium  on  a  3%  per 
cent,  basis  for  the  Carnegie  combination  of  a  $10,000 
annuity  policy  with  the  $10,000  decreasing  insurance 
policy.  The  3j4  per  cent,  net  premium  for  the  true 
$10,000  Endowment  at  65  is  $217,  or  $27  less.  When 
we  use  the  published  rates  of  the  Teachers'  Association, 
where  the  annuity  premium  is  computed  upon  a  4  per 
cent,  basis,  this  difference  is  reduced  to  about  $10.  * 

For  example,  from  page  99  of  the  Teachers'  Associa- 
tion Handbook,  we  learn  that  $8.58  is  the  monthly 
premium  at  age  30  for  the  Association's  $10,000  de- 
creasing insurance  policy.  From  Table  II  on  page  1 1 1 
we  compute  that  $11.08  is  the  Association's  monthly 
savings  fund  premium  to  accumulate  $10,000  in  35 
years.  The  two  together,  therefore,  amount  to  $19.66. 
From  page  109,  we  learn  that  the  monthly  prem- 
ium at  age  30  for  the  Association's  $10,000  Endowment 
at  65  is  $18.80.  On  the  yearly  basis  therefore,  the  pub- 
lished rates  appear  to  indicate  that  the  combination 
costs  but  about  $10  more  than  the  endowment. 

*  In  the  interest  of  simplicity  and  to  emphasize  principles  rather  than, 
minor  details,  no  reference  is  made  in  this  comparison  to  any  disability 
element  that  may  be  contained  in  the  Association's  premiums. 

12 


From  what  has  been  said  upon  the  subject  of  partici- 
pation, it  is  evident  that  the  reduction  in  the  difference 
between  the  two  premiums  would  be  nullified  in  the 
long  run  if  the  teachers  were  granted  the  right  to  re- 
ceive the  surplus  realized  upon  their  policies.  For 
obviously  the  surplus  realized  from  interest  earnings 
would  be  greater  under  a  3j/2  per  cent,  contract  than 
under  a  4  per  cent,  contract.  Under  a  participating 
policy,  as  stated  above,  the  ultimate  actual  cost  depends 
upon  experience,  and  not  upon  the  assumptions  under- 
lying the  premium  calculation. 

Joining  the  Issue 

The  Teachers'  Association  is  a  fine  conception 
affording  college  teachers  an  assistance  which  does  not 
savor  of  charity.  The  general  principles  laid  down  for 
its  guidance  are  sound.  Among  the  private  companies 
there  will  be  no  feeling  of  rivalry  with  the  new  Asso- 
ciation which  they  welcome  to  the  insurance  brother- 
hood. It  is  in  no  unfriendly  spirit  that  regret  is 
expressed  that  the  Carnegie  Foundation  and  the 
Teachers'  Association  have  apparently  failed  to  see 
how,  for  the  average  man,  the  well-tried  endowment 
form  completely  carries  out,  in  the  simplest  and  most 
effective  way  their  own  basic  principles.  Through 
their  failure  to  see  this  clearly  they  put  themselves  in 
the  false  position  of  criticising  the  endowment  form 
as  expensive,  and  then  of  recommending  a  combination 
which,  compared  upon  a  participating  basis,  requires  a 
larger  outlay  of  money,  but  provides  the  same  sum  at 
retirement.  In  presenting  our  analysis  of  the  combina- 
tion, we  are  fortified  by  the  Provident's  experience  with 
thousands  of  satisfied  policyholders  who  have  lived  to 

13 


receive  payment  under  their  matured  old  age  endow- 
ments. And  according  to  our  mortality  experience, 
about  sixty-eight  out  of  every  hundred  policyholders 
who  insure  at  age  30  live  to  age  65. 

The  idea  suggests  itself  that  the  real  reasons  for 
recommending  the  somewhat  cumbersome  combina- 
tion of  two  policies,  one  savings  and  one  protection,  are 
not  brought  forward.  One  reason  may  be  that  the 
Carnegie  Foundation  believes  that  the  separation  into 
two  policies  will  render  it  easier  for  the  college  to 
assist  financially  in  providing  the  annuity  at  retire- 
ment. Another  may  be  that  it  believes  it  wise  to  pro- 
vide an  annuity  policy  against  which  the  teacher  will 
not  have  the  right  to  borrow.  If  these  be  the  real 
reasons,  the  objections  to  the  well-tried,  satisfactory 
endowment  plan  are  wholly  extrinsic;  and  it  is  a  matter 
of  regret  that  the  endowment  form  of  insurance  should 
have  been  presented  as  inherently  objectionable. 

We,  of  course,  have  nothing  to  do  with  the  form  of 
Teachers'  Association  policy  which  any  teacher  may 
choose.  We  have  to  do  only  with  our  own  policy- 
holders, present  or  prospective,  who  may  not  have 
noticed  the  inconsistency  in  the  publications  of  the  Car- 
negie Foundation  and  in  the  Handbook,  between  the 
criticism  of  endowment  insurance  as  expensive,  and  the 
recommendation  of  a  still  more  expensive  form  con- 
taining the  identical  endowment  element;  or  between 
the  statement  in  the  1917  Annual  Report  that  endow- 
ment insurance  is  an  "investment  rather  than  a  means 
of  protection  against  risk,"  and  the  warm  recommenda- 
tion of  a  savings  fund  annuity  policy  as  a  means  of  pro- 
tection against  one  of  the  major  risks  of  life — the  risk 
of  dependency  in  old  age. 

14 


English  Retirement  System   Based  Upon 
Endowment  Policy 

It  is  interesting  to  note  that  the  English  Universities 
in  their  Federated  Superannuation  Plan  employ  the 
old  age  endowment  as  their  standard  for  teachers  with 
dependents,  and  the  annuity  policy  alone  for  teachers 
without  dependents.  In  our  judgment  these  two  poli- 
cies, with  perhaps  the  addition  of  short  term  insurance, 
form  the  basis  of  the  ideal  retirement  system.  Further- 
more, a  system  of  this  kind  possesses  great  flexibility. 
The  annuity  and  savings  fund  accumulation  options, 
which  will  be  incorporated  in  the  savings  fund  annuity 
policy  of  the  Teachers'  Association,  may  be  incorpo- 
rated in  an  old  age  endowment  policy. 

If  it  is  not  desirable  that  the  teacher  withdraw  from 
teaching  when  the  endowment  matures,  say  at  age  65, 
provision  can  be  made  for  continuing  the  premium  pay- 
ments on  a  pure  savings  fund  basis,  so  that  an  increased 
accumulation  will  be  available  for  the  annuity  when 
retirement  does  take  place.  If  retirement  should  occur 
prior  to  maturity  of  the  endowment  the  cash  value  of 
the  endowment  is  available  to  purchase  the  annuity. 

If  the  college  desires  to  render  financial  assistance 
only  in  building  up  the  fund  which  will  provide  the 
retirement  pension,  it  may  do  so  under  the  endowment 
policy,  since  the  endowment  premium  involves  a 
definite  savings  fund  element  that  may  always  be 
calculated. 

It  may  be  desired  to  limit  the  teacher's  power  to 
borrow  against  the  accumulation  standing  to  his  credit. 
Such  borrowing,   if  extensively  indulged  in,  would 

15 


largely  defeat  the  purpose  for  which  the  retirement 
plan  was  instituted.  One  way  of  meeting  this  problem 
when  the  endowment  policy  is  adopted  as  the  standard, 
is  to  have  the  policy  issued  in  favor  of  a  Trustee  or 
Trustees  appointed  for  the  purpose.  The  Trustee  in 
return  would  execute  an  agreement  with  the  teacher 
providing  that  if  the  policy  proceeds  should  become 
payable,  they  would  be  applied  by  the  Trustee  in  a 
manner  specified  by  the  teacher.  This  is  the  method 
adopted  by  a  Retirement  Fund  recently  established  for 
teachers  in  schools  under  the  care  of  Philadelphia 
Yearly  Meeting  (Fourth  and  Arch  Streets)  of  the 
Society  of  Friends. 

Conclusion 

The  Provident  Life  and  Trust  Company  has  a  pecu- 
liar interest  in  the  Carnegie  plan  for  the  reason  that 
the  Company  has  had  an  extensive  experience  with 
endowment  insurance.  Prior  to  the  first  of  December, 
1918,  it  had  paid,  since  the  organization  of  the  Com- 
pany in  186S,  $51,700,000  in  matured  endowments,  as 
against  $52,600,000  for  death  claims.  Last  year  66  per 
cent,  of  its  new  business  was  on  the  endowment  plan, 
written  to  mature,  on  the  average,  at  age  63.  During 
the  same  year  the  other  companies  operating  in  the 
State  of  New  York  wrote  but  17j^  per  cent,  of  their 
new  business  on  the  endowment  plan.  We  have  seen 
the  old  age  endowment  policy  work  out  so  satisfactorily 
in  thousands  of  instances  that  we  are  more  and  more 
convinced  that  it  is  the  ideal  form  of  policy  to  provide 
protection  against  the  two  contingencies  of  premature 
death  and  dependency  in  old  age. 

16 


SUPPLEMENT 

Views  of  Carnegie  Foundation  Upon  Endow- 
ment Insurance 

The  indices  of  Bulletin  Number  Nine,  and  the  1916  and  1917 
Annual  Reports,  all  published  by  the  Carnegie  Foundation,  contain 
five  references  to  Endowment  Insurance  or  Endowment  Policies. 
Of  these  references  the  three  which  present  the  attitude  of  the 
Foundation  toward  endowment  insurance  are  reprinted  below.  In 
the  foregoing  article  we  have  commented  upon  the  conclusions  that 
we  draw  from  these  quotations. 

Bulletin  Number  Nine,  Page  27 

"For  the  present  misconception  of  the  function  of  insurance 
the  great  insurance  companies  are  in  part  responsible.  They 
have  educated  the  public  away  from  the  primary  use  of  insur- 
ance. The  process  has  been  a  natural  one.  Endowment  and 
tontine  policies  mean  large  payments,  great  accumulations  in 
the  hands  of  the  companies  for  investment,  and  greatly  increased 
commissions  for  the  agents.  The  enterprising  life  insurance 
agent  naturally  sells  an  ordinary  life  or  a  term  policy  only 
after  he  fails  to  persuade  the  purchaser  of  insurance  to  take 
one  of  the  more  expensive  forms.  For  teachers,  as  for  all  other 
men  upon  fixed  salaries,  investment  policies  are  essentially  against 
their  interest.  They  are  justified  upon  one  ground  only,  and  that 
is  the  ground  usually  assigned  by  teachers  themselves.  Only  by 
creating  a  definitely  recurring  obligation  does  the  typical  teacher 
find  it  possible  to  save  money  at  all.  He  realizes,  when  his 
endowment  policy  matures  at  the  end  of  twenty  or  thirty  years, 
that  as  an  investment  it  represents  a  poor  return,  but  he  consoles 
himself  with  the  reflection  that  but  for  the  insurance  policy  he 
would  most  probably  have  saved  no  money  at  all." 

Eleventh  Annual  Report  (1916),  Page  46 

"Only  one  complaint  of  a  definite  sort  has  appeared  in 
reference  to  the  statements  concerning  insurance  made  in  the 
Bulletin.     This  came   from  the  actuary  of  a  company  whose 

17 


principal  business  is  the  selling  of  endowment  policies.  It 
referred  to  the  Bulletin  as  an  attack  upon  endowment  insurance. 

"It  requires  but  a  glance  at  the  Bulletin  itself  to  show  the 
mistake  of  this  view.  In  no  respect  was  endowment  insurance 
as  such  attacked.  It  was  shown,  however,  that  endowment 
insurance  was  not  that  form  of  insurance  adapted  to  the  needs 
of  a  man  upon  modest  salary,  who  has  a  pension  guaranteed 
to  him  if  he  lives  to  a  certain  age.  To  a  man  so  circum- 
stanced insurance  as  an  investment  offers  meagre  returns.  Two 
reasons  influence  teachers  in  the  purchase  of  such  policies,  out- 
side the  solicitations  of  the  agent.  The  first  is  that  by  binding 
himself  to  a  fixed  obligation  of  definite  amount  each  year,  the 
teacher  forces  himself  to  save  money.  The  second  is  that  an 
endowment  policy  is  a  convenient  security  upon  which  to  bor- 
row, a  circumstance  which  too  often  results  in  defeating  the 
purpose  of  insurance.  The  endowment  policy  does  not  meet 
the  need  of  legitimate  insurance  for  men  circumstanced  as  are 
teachers.  This  is  no  criticism  upon  companies  which  sell  this 
form  of  insurance,  but  it  illustrates  the  fact  that  the  selling 
point  of  view  in  life  insurance  does  not  always  conform  to  the 
interest  of  the  buyer. 

"The  criticism,  so  far  as  it  undertook  to  compare  the  results  of 
term  insurance  as  here  offered  with  those  obtained  in  the  last 
thirty  years  from  endowment  policies,  was  entirely  misleading." 

Twelfth  Annual  Report  (1917),  Pages  51,  52 

"Endowment  policies  represent  a  form  of  insurance  in  which 
the  purpose  of  protection  is  in  large  measure  subordinated  to 
that  of  investment.  Endowment  policies  provide  for  the  pay- 
ment of  the  face  of  the  policy,  not  only  upon  the  death  of  the 
insured,  but  also  at  the  end  of  the  stated  term,  if  the  insured 
be  still  living.*  This  form  of  policy  is  extremely  popular  among 
teachers  as  well  as  among  other  purchasers  of  insurance.  The 
notion  that  the  insured  is  providing  something  not  only  for 
the  protection  of  his  dependents,  but  also  something  for  his  own 

♦These  are  exactly  the  reasons  why  the  old  age  endowment  fully 
protects  against  life's  two  major  contingencies — premature  death  and 
dependency  in  old  age. 

18 


protection  and  profit,  is  one  that  appeals  to  a  well-nigh  universal 
human  trait.  It  departs,  however,  from  pure  insurance,  in  two 
respects.  The  motive  is  no  longer  simply  the  protection  of 
dependents.  Also,  such  insurance  is  an  investment  rather  than 
a  means  of  protection  against  risk.* 

"The  argument  generally  advanced  in  recommending  this 
form  of  insurance  is  that  it  constitutes  a  safe  method  for  saving 
and  one  open  to  the  individual  of  small  and  large  means  alike. 
A  large  number  of  teachers  invest  in  endowment  policies  for  the 
same  reason  that  other  men  of  limited  income  make  such  invest- 
ments, influenced  partly  by  the  arguments  of  the  life  insurance 
agent,  who  generally  prefers  to  sell  an  endowment  policy,  and 
partly  by  the  very  natural  feeling  that  here  is  a  reservoir  to 
which  he  may  go  in  case  of  any  pressing  need." 

♦Why  not  a  protection  against  the  risk  of  dependency  in  old  age,  the 
very  risk  against  which  the  Foundation  would  provide  by  means  of  a 
savings  fund  annuity  policy? 


19 


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WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
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APK     7   1933 
APR     8  1933 

APR    9    1933 

■^ 

APH  20)193^ 

P 

^-7 

APR  17  193 

6 

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Rr_«.::'D  LD 

MAR  31  I960 

LD  21-50»i-l,'33 

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414727 

4^S  133^ 

/  :r 

UNIVERSITY 

OF  CAUFORNIA  UBRARY 

